Most developing countries continue to face challenges in accessing sustainable energy. This study investigates a solar panel and battery-powered system for an urban off-grid microgrid in Nigeria, where demand-side flexibility and strategic interactions between households and utilities can optimize system sizing. A nonlinear programming model is built using bilevel problem formulation that incorporates both the households’ willingness to reduce their energy consumption and the utility’s agreement to provide price rebates. The results show that, for an energy community of 10 households with annual energy demand of 7.8 MWh, an oversized solar-storage system is required (12 kWp of photovoltaic solar panels and 26 kWh of battery storage). The calculated average cost of 0.31 €/kWh is three times higher than the current tariff, making it unaffordable for most Nigerian households. To address this, the utility company could implement Demand Response programs with direct load control that delay the use of certain appliances, such as fans, irons and air conditioners. If these measures reduce total demand by 5%, both the required system size and overall costs could decrease significantly, by approximately one-third. This adjustment leads to a reduced tariff of 0.20 €/kWh. When Demand Response is implemented through negotiation between the utility and households, the amount of load-shaving achieved is lower. This is because households experience discomfort from curtailment and are generally less willing to provide flexibility. However, negotiation allows for greater flexibility than direct control, due to dynamic interactions and more active consumer participation in the energy transition. Nonetheless, tariffs remain higher than current market prices. Off-grid contracts could become competitive if financial support is provided, such as low-interest loans and capital grants covering up to 75% of the upfront cost.